Structural Reform of the EU Banking Sector

Following the conclusions of the High-Level Expert Group (HLEG) chaired by Erkki Liikanen, the EU Commission has released in 2014 a proposal on the structural reform of the EU banking sector. The EU Commission proposal is articulated around two main principles:

  • The ban of proprietary trading, which is used for speculative purpose and has no link with depositors and real economy,
  • The potential separation of risky market activities other than proprietary trading, where more responsibility is given to the supervisor. If it is justified, the supervisor will impose a subsidiarisation of these activities.

The Luxembourg banking sector is mostly customer-related, focusing on the provision of banking services to its customers, i.e. retail customers, corporate customers, high net worth individuals, investment funds, institutional investors, etc.

As a priority, we consider that customer-related transactions should not be assimilated to trading activities, and that they should remain in the deposit bank. Customer-related transactions, encompassing the products and services provided to the full range of banks’ customers, create little or no risk at all for the bank because:

  • Where the bank acts as counterparty of the customer for a derivative transaction, it covers the risk by performing a transaction of opposite sense with another counterparty. As a result of these “back-to-back” transactions, the bank keeps in its books only the residual position, which corresponds to its margin on both transactions,
  • Where the bank acts as adviser or as agent, it is not counterparty to the transaction and incurs no risk at all.